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ISSUE10728.09.2016capt iveinsurancet imes.com
The Great GuernseyInnovation is key to being a significant
market player
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Latest News
2
Verve cell launches with captive focus
Verve Risk Partners has launched as a cell on the Castel
Underwriting Agencies platform that will target US professional and
management liability risks, focusing on insurance companies and
captives.
The cell, Verve, will include errors and omissions and directors
and officers coverage for captive insurance companies, risk
retention groups, captive managers and various others.
Scott Simmons and Alan Lambert, who are both partners in the
business, will lead the cell.
Randall & Quilter Investment Holdings (R&Q) has acquired
the United States Sports Insurance Company (USSIC), a wholly owned
captive of USA Swimming.
USSIC, which is in run-off, had a total net asset value of $5.3
million as of 30 June this year. In addition, the company totalled
an income of $0.97 million as of year-end 2015.
To acquire USSIC, the total consideration paid by R&Q was
$2.1 million, financed by a draw down on the group’s revolving
credit facility with the Royal Bank of Scotland.
The captive, originally domiciled in Barbados, redomiciled to
Washington DC, effective at the end of 2014.
Simmons, partner at Verve, said: “Castel provides us with a
comprehensive and robust infrastructure that has enabled us to
bring Verve to fruition quickly, and deliver certainty to our
capacity providers and wider market stakeholders.”
Vitol Holdings captive receives top ratings from A.M. Best
A.M. Best has affirmed the financial strength ratings of “A
(Excellent)” and the long-term issuer credit rating of “a” of
Rembrandt Insurance Company, located in Bermuda.
Rembrandt is captive reinsurer and insurer of Vitol Holding, a
holding company of a
USSIC reinsured a US company, which provided coverage to USA
Swimming as well as its local swimming committees and clubs,
throughout the US from 1988 to year-end 2013.
The directors of USSIC will be appointed from R&Q existing
staff in the US and Bermuda.
Ken Randall, chairman and CEO of R&Q, commented: “We are
delighted to complete the acquisition of USSIC.”
“This transaction demonstrates our ongoing commitment to
continue to acquire legacy insurance assets and also continues to
expand our acquisition activity in the North America, Bermuda and
the Caribbean region.”
Latest NewsThe UK government plans to implement an
insurance-linked securities strategy for 2017
page 4
Latest NewsWillis Re upgrades its cyber risk portfolio-modelling
tool PRISM-Re
page 8
Latest NewsR&Q Investment Holdings acquires the Royal London
General Insurance Company, a UK non-life insurance company in
run-off
page 10
Forum ReportAttendees at this year’s Guernsey Insurance Forum
heard how Guernsey is positioning itself to become a significant
player in international insurance
page 13
831(b) CaptivesAlan Fine of Brown Smith Wallace explains three
options to maintain compliance with changes to Section 831(b)
page 18
Industry AppointmentsComings and goings at Rewire Securities,
the Delaware Insurance Department and Hanover Stone Partners
page 22
Contents
R&Q acquires USA Swimming captive
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Latest News
4
The Maples Group, an international law firm, supported the
Crosswinds Re domicile in the Cayman Islands. Maples and Calder
will act as Cayman Islands counsel, led by partners Abraham Thoppil
and Tim Frawley.
Colin King, CEO of Crosswinds Re, commented: “The reputation of
the Cayman Islands as the jurisdiction of choice for insurance and
reinsurance companies, combined with an established network of
high-quality service providers and robust regulatory regime, made
this an attractive domicile for Crosswinds Re.”
Alasdair Robertson, global managing partner of Maples and Calder
and chairman of MaplesFS, commented: “We are pleased to have
supported Crosswinds Re in their Cayman Islands domiciliation and
look forward to continuing to work together as their business
evolves.”
Dow’s Dorinco Reinsurance retains ‘excellent’ rating
A.M. Best has affirmed the financial strength rating of “A
(Excellent)” and the long-term issuer credit rating of “a” of the
Dorinco Reinsurance Company, with the outlook remaining stable.
Dorinco is the captive reinsurance company of The Dow Chemical
Company.
According to A.M. Best, the rating is based on Dorinco’s ability
to deliver strong combined ratios, as well as its positive net
income and strong risk-adjusted capitalisation.
A.M. Best also noted that the captive maintains a conservative
investment portfolio, continuing parental support, and a “prudent
approach to underwriting”.
Partially offsetting the positive rating, however, is Dorinco’s
“limited profile in the reinsurance market, which is a function of
its hybrid captive nature,” A.M. Best said.
Factors that could potentially lead to a downgrade include
“significant” catastrophe or investment losses, “significant”
decline in risk-adjusted capitalisation, and “unfavourable”
operational profitability trends.
Reinsurance demand continues to rise, says Aon
Reinsurance demand has increased over the past 18 months and the
trend is expected to continue for the rest of 2016, according to a
new Aon report.
The reinsurance market outlook report revealed that Aon expects
demand for cyber insurance coverage and products to continue.
group engaged in trading petroleum-related products and
commodities.
According to A.M. Best, the ratings reflect Rembrandt’s “very
strong financial performance and excellent risk-adjusted
capitalisation, as well as its importance to the Vitol group as a
risk management tool”.
The rating agency said: “The company’s risk-adjusted
capitalisation remains excellent, supported by good internal
capital generation, low net underwriting leverage and an outward
reinsurance programme that is placed with a panel of financially
strong reinsurers.”
“A marginally offsetting factor is the captive’s concentrated
asset base, with a loan facility provided by Rembrandt to the Vitol
group, representing 75 percent of total assets at year-end 2015.
The investment risk associated with this loan is somewhat mitigated
by terms that allow it to be redeemed at short notice.”
Kattan Associates gets Greenlight
Greenlight Reinsurance Ireland, a subsidiary of Greenlight
Capital Re, has appointed Kattan Associates Limited to develop
business opportunities in the European and Asian markets on its
behalf.
Brendan Barry, chief underwriting officer of Greenlight Re,
commented: “This is an important step for Greenlight Re Ireland as
we continue to expand our global footprint and further diversify
our underwriting portfolio.”
“We believe that the extensive experience and relationships that
Kattan Associates brings to the insurance industry will provide an
excellent network for Greenlight Re to access attractive
business.”
Habib Kattan, owner and director of Kattan Associates, added: “I
am delighted that Greenlight Re has become a client of Kattan
Associates and I look forward to generating profitable underwriting
opportunities to expand its client base and underwriting portfolio
in Europe and Asia.”
Crosswinds Re sets up shop in the Cayman Islands
Crosswinds Re, a new specialty reinsurance business vehicle
established by Crosswinds Holdings, has received approval from the
Cayman Islands Monetary Authority as a class B reinsurer.
The new specialty reinsurer will be part of a larger integrated
insurance, reinsurance and asset management structure that will
mainly focus on the Florida property and casualty insurance
market.
UK government hints at 2017 ILS implementationThe London Market
Group (LMG) has confirmed the UK government’s plans to implement an
insurance-linked securities (ILS) strategy for early 2017.
LMG received a letter from Simon Kirby, the economic secretary
to the treasury, in which he laid out timings and the next steps
towards the ILS project in London.
The update comes following the Treasury’s consultation on the
overall approach to the regulation and taxation of ILS special
purpose vehicles. The next stage will be to finalise the
regulations and implement the new framework.
Kirby said: “The role that London plays as a global hub for
specialist insurance and reinsurance is an important part of the
UK’s financial sector exporting strength.”
“Given the increasing importance of alternative risk transfer
techniques, the ILS project aims to provide London with the
framework it needs to remain a world leader in reinsurance. I am
very grateful for the productive contribution that the LMG has made
to this project.”
Nicolas Aubert, chairman of the LMG, added: “We are heartened to
hear that the ILS project remains a priority for the treasury, and
we very much look forward to working with them to ensure successful
implementation of the UK’s new ILS framework as soon as possible in
2017.”
-
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Latest News
6
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Florida is back in the business of licensing captive insurance
companies, according to Holland & Knight partner Nathan Adams
and senior policy officer Beth Vecchioli.
On 11 August 2016, the Florida Office of Insurance Regulation
issued a licence to a non-profit Florida corporation to write
medical malpractice, other liability and miscellaneous
casualty.
This was the first licence issued to a domestic captive insurer
since 1988, in accordance to a Florida statute last amended in
2013.
Adams compared Florida to the likes of Vermont, Utah and South
Carolina. He suggested Florida is “equally constructive
It showed that nearly 90 percent of the market is based in the
US, with annual growth running at 30 to 50 percent.
According to the report, international growth will be driven by
upcoming EU regulations covering data protection, which will become
effective in 2018.
The report also highlighted demand for property catastrophe
protection, with Aon expecting demand to remain relatively stable
for January 2017 renewals.
It found that while certain regions affected by regulatory
changes may look to secure additional capacity, overall demand
change is expected to increase by approximately 5 percent across
the market.
PwC: increase in business run-off activity
Exit or restructuring activity is on the up, according to a PwC
survey, with 77 percent of respondents saying they expect to engage
in it by 2019.
The new survey from PwC, Discontinued Insurance Business in
Europe, predicted that sales of legacy liabilities to specialist
run-off acquirers and group restructurings through business
transfers would be the
and interested in building a captive industry in the Sunshine
State”.
He suggested that Florida being open to license captives again
would “benefit local companies and stimulate business tourism as a
result of the minimum mandatory annual meeting requirement”.
Vecchioli suggested that captives are especially attractive in
Florida due to its “relatively high” property insurance rates.
She said: “Under the Florida Insurance Code, the only lines
captives may not ordinarily insure include workers’ compensation
and employer’s liability, life, health, personal motor vehicle and
personal residential property insurance.”
Florida is open for captive business
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Latest NewsBRITISH VIRGIN ISLANDS
BVI remains a highly sought-after domicile for enhanced
insurance products and services, fully compliant with the
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It is easy to obtain affordable structures due to its
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8
and estimates downward risk arising from privacy breaches.
The 2016 update includes access to the modelling of cyber losses
from out of network outages.
Mark Synnott, executive vice-president of Willis Re, said: “We
are extremely proud of the unique work we have been doing with
clients to help them better understand and manage their cyber
exposures since the launch of PRISM-Re.”
“The 2016 update further enhances our capabilities in the
rapidly evolving cyber arena and we look forward to introducing it
to our clients over the coming months as we roll it out across our
global network via our client advocates.”
Aon sees decrease in catastrophebond transactions
A total of 24 catastrophe bond transactions closed during a
12-month period, ending 30 June this year, with a limit of $5.2
billion, a decrease of $7 billion on the previous period, according
to Aon Securities.
Aon’s report, Alternative Markets Find Growth Through
Innovation, revealed that
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key tools to unlocking value for owners in run-off business.
According to PwC, the past year has been “extremely busy” for
the European run-off market, and it expects activity to continue at
its current pace.
The survey also revealed that 81 percent of respondents predict
that Europe will see more than 10 disposals of legacy business
portfolios over the next two years.
It found that the number one objective for companies using a
strategic run-off plan was to release capital.
Board engagement was named as the main challenge for continental
European reinsurers and insurers with run-off business.
PwC estimated that the overall size of the European non-life
discontinued business market remains flat at just under €250
billion.
The survey, carried out in July 2016, noted no immediate impact
following the UK’s decision to leave the EU. However, depending on
amendments to the passporting rules, the report suggested that some
companies may restructure as they re-evaluate the best location for
their business.
Andrew Ward, director of PwC’s solutions for discontinued
insurance business team, commented: “Europe’s run-off market has
had an exceptionally busy year and the transaction environment
continues to thrive. Board level engagement on legacy business is
still a challenge for continental European insurers in particular,
but the volume of deals we have seen in the UK and to some extent
on the continent shows that legacy is in the spotlight for many
reinsurers and insurers.”
“Solvency II has really focused attention on the most effective
use of capital and is increasingly generating opportunities for
acquirers of run-off. Insurers with legacy business are beginning
to make decisions around the capital benefits associated with
disposing of discontinued books. We expect to see this trend
continue for some time as Solvency II becomes embedded within
middle tier and more niche reinsurers and insurers.”
Willis Re upgrades cyber insurancemanagement tool
Willis Re has launched an update of its cyber risk
portfolio-modelling tool, PRISM-Re at the annual Monte Carlo
Rendez-Vous.
PRISM-Re, which was first released in 2015, helps clients to
manage their cyber portfolios
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10 11
the decrease was largely due to “significantly lower” issuance
volumes during H1 2016, as issuance volumes during H2 2015 were
“relatively flat” on a year-over-year basis.
It also found that US exposures continued to dominate the
catastrophe bond market, with 18 of the 24 transactions comprising
US risk in some capacity.
On a notional basis, this represented 83 percent of the period’s
issuance, compared to 86 percent in the prior year period,
according to the report.
The report identified that three catastrophe bonds closed
covering property risks in Europe, and three insurers required
coverage for Japan risks with catastrophe bonds, securing a $720
million total limit.
In addition, one extreme mortality bond was brought to market,
covering Australia, Canada and UK risks.
In addition, five quota share sidecars were launched during the
12 months, with a capacity totalling $1.1 billion for the four
sidecars that disclosed their sizes.
Paul Schultz, CEO of Aon Securities, said: “During the 12-month
period under review we saw a continued increase in alternative
capital in the reinsurance sector.”
A.M. Best suggested available capital is “likely to increase” in
2016 due to a non-recurring return premium payment of €17.5 million
to EID from a reinsurance company.
R&Q buys UK-based insurance company in run-off
Randall & Quilter Investment Holdings has acquired the Royal
London General Insurance Company (RLGI), a UK non-life insurance
company in run-off.
R&Q purchased the insurance company from the Royal London
Mutual Insurance Society for £11.9 million, representing a small
discount to RLGI’s net assets of £13.5 million at year-end
2015.
Once the transaction has received regulatory approval, RLGI will
transfer to R&Q Insurance Malta. R&Q aims to complete this
by the end of 2017.
Ken Randall, chairman and CEO of R&Q, said: “We are
delighted to have reached agreement to acquire RLGI and this
continues to demonstrate the ability of R&Q to provide exit
solutions to owners of insurance companies in run-off.”
“This will be the second transaction where R&Q has provided
non-life legacy solutions to the life and pensions sector. We
remain excited about our legacy acquisition pipeline.”
In R&Q’s H1 2016 results, the company revealed that it would
step up its acquisitions of various insurance companies, including
captives insurers.
The report said that the transactions would range from UK
insurance companies to US novations, loss portfolio transfers and
the purchase of onshore and offshore US and UK captives.
Insurance industry facing ‘perfect storm’, says PwC
The industry is facing a “perfect storm” of soft rates, low
investment yields and new regulation, as well as feeling the impact
of new technology, shifting customer expectations and the threat of
losing margins to “nimble” insurtech entrants, according to a new
report from PwC.
The annual PwC report, released at the Monte Carlo Reinsurance
Rendez-Vous, challenged the insurance and reinsurance industry to
take brave steps in their cost reduction strategies.
It found that 70 percent of insurance business leaders plan to
implement a cost reduction
He added: “However, continuing a recent trend, the capital is
being increasingly deployed in the collateralised reinsurance space
rather than in the form of catastrophe bonds, whose overall lower
issuance volumes were driven by a number of factors.”
“[These include] competition from traditional markets and longer
coverage periods, both of which result in some cedents renewing
capacity less frequently, and certain cedents increasing their risk
retentions.”
EID receives ‘excellent’ ratings
A.M. Best has affirmed the financial strength rating of “A
(Excellent)” and the long-term issuer credit rating of “a” of Eni
Insurance Designated Activity Company (EID).
EID is a sole captive insurer of Eni, an Italian multinational
gas and oil company.
The ratings reflect EID’s “strong” underwriting profitability
and “excellent” risk-adjusted capitalisation, according to A.M.
Best.
The ratings also consider the captive’s importance to the Eni
Group as a risk management tool.
EID’s risk-adjusted capitalisation, meanwhile, is “expected to
remain excellent”.
The UK’s treasury committee has raised concerns about the EU’s
Solvency I I Direct ive.
Following the UK’s vote to leave the EU, the treasury has agreed
terms of reference to launch an inquiry into the regulation.
The inquiry will explore the impacts of the directive, and the
options now available to the UK, in more detail.
Andrew Tyrie, member of parliament and chairman of the Treasury
committee, said: “Brexit provides an opportunity
for the UK to assume greater control of insurance
regulation.”
“The Solvency II Directive came into force in January, only
after a heap of concerns had been expressed about it.”
“Among its manifest shortcomings was the failure to secure value
for money over its implementation.”
“The treasury committee will now take a look at the Brexit
inheritance on insurance to see what improvements can be made in
the interests of the consumer.”
UK treasury committee launch Solvency II inquiry
-
Latest News
11
initiative over the coming year. However, PwC argued that
squeezing a few percentage point savings is no longer enough in
such a competitive and disrupted marketplace.
According to PwC, investment in technologies that sharpen the
precision of risk selection and pricing but also improve the
overall operations efficiency and effectiveness, will be “crucial”
for companies looking to differentiate themselves.
The report said: “Those who take up the challenge will see
significant cost savings and a game-changing boost in customer
relationships.”
Stephen O’Hearn, global insurance leader at PwC, commented:
“Many insurance executives have had bruising prior experiences with
cost initiatives failing to deliver long-term gains or culture
change within the organisation. But the time to confront the
challenge is now.”
Global reinsurance capital up by 4 percent, finds Aon
Aon Benfield estimates that total global reinsurance capital
increased by 4 percent to a record $585 billion over H1 2016.
The figure, which comprises capital from both traditional and
alternative markets, shows
Munich Re invests in new data platform
Munich Re, together with its partners, has installed the SAS
Analytics and Hortonworks data platform for its big data
initiative.
With the new data platform, Munich Re intends to increase its
clients’ resilience against economic, political and cyber
risks.
The platform enables departments to explore new ideas, develop
new business fields and further enhance customer service.
Marc Wewers, lead IT architect for big data and analytics at
Munich Re, commented: “As a reinsurer with worldwide operations, we
have vast data resources at our disposal. We now want to leverage
them fully to advance our business and realise pioneering business
models.”
Wolfgang Hauner, chief data officer at Munich Re, added: “A
platform like this can only work if the users are happy with it.
The rapidly rising numbers of users and the large number of
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that traditional capital rose by 3 percent to $510 billion and
alternative, a 5 percent rise to $75 billion.
The report revealed that total premiums written by the Aon
Benfield Aggregate increased by 5 percent to $130 billion, with the
main driver being consolidation activity.
It also showed that total investment returns benefited from
significant capital gains linked to declines in interest rates.
The assumption of higher levels of asset risk stabilised the
annualised ordinary investment yield at 2.6 percent, but the figure
remains 40 percent below the level seen prior to the financial
crisis, according the report.
Mike Van Slooten, co-head of Aon Benfield’s market analysis
team, said: “The combined effects of lower-for-longer interest
rates and underwriting margin compression were evident in this
period.”
“Earnings have clearly become more sensitive to catastrophe
losses and prior year reserve development. However, the return on
equity remains attractive relative to other sectors and should be
viewed in the context of a continuing decline in the cost of
capital.”
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Attendees at this year’s Guernsey Insurance Forum heard how
Guernsey is positioning itself as a ‘significant player’ in the
international insurance community
Innovation and opportunity
Forum Report
After taking a break from hosting its annual insurance event,
Guernsey Finance came back to the marketplace in style, hosting a
fast-moving and informative event in London.
The event, moderated by ITV presenter Alistair Stewart,
consisted of two panel discussions focusing on the latest market
trends, developments and growth potentials in the captive insurance
and captive reinsurance market in Guernsey.
In his opening speech, Dominic Wheatley, CEO of Guernsey
Finance, spoke of “innovation” and “two new phenomena” that have
started gathering momentum in Guernsey’s captive market.
Wheatley revealed the new trends that come from the roots of the
reinsurance market, are insurance-linked securities (ILS) and
collateralised reinsurance.
“To see all areas of our industry in such robust form
demonstrates not only its quality and substance, but also
emphasises that
Guernsey is a player of significance in the international
insurance community,” Wheatley said.
Market trends and developments
Steve Britton, managing director of Aon’s global ILS management
and panellist at the forum, revealed that the worldwide ILS market
doubled between 2010 and 2015, growing at a rate of 25 to 35
percent each year. He noted, however that, as of June this year,
the rate of growth did dip to 10 percent.
Britton referred to a Goldman Sachs article from 2013, The 8
Extraordinary Technologies Forcing Businesses To Adapt Or Die,
which noted that collateralised reinsurance was listed as the
fourth largest growing trend.
Now in 2016, Britton described the ILS market as a “big baby”
and emphasises the fact that the market is only going to get
bigger. He noted that in the next five years the ILS market could
represent $1 in every $5.
Becky Butcher reports
-
He said: “Growth will be driven by demand. There is already
plenty of supply, there is just not enough demand for it yet. If
there is demand, investors will put money into this market.”
The slow market is because of the current soft market, according
to Britton. He suggested when a ‘big event’ happens, more money
from investors will appear in the market.
He reassured attendees that although this year saw a dip in ILS
growth, by next year rates should increase back to 15 to 20
percent.
Stewart asked panellists what is driving that demand in the
industry, questioning whether the industry was reacting to growing
demand or whether it was the industry creating demand.
To this, Britton suggested that the answer is both. He said: “If
you talk to the bankers, who structure these transactions, they
suggest there is still not enough demand. Collateralised
reinsurance is just another form of offsetting capacity.”
According to Britton, considering the largest economic losses
occurring in the world, there are still countries not purchasing
insurance.
John Rowson, CEO of Kelvin Re, added that, while capacity is
available, the industry should be making sure that insurance is
being purchased in countries that currently do not buy it.
After Wheatley referred to Guernsey’s “innovation” in his
opening speech, Mark Helyar, counsel of Bedell Cristin, revealed
that Guernsey has drafted a set of rules to provide “extensive
guidance” for its special purpose insurers (SPIs), set to go live
before the end of 2016. The panel discussed Guernsey building an
SPI structure. Helyar, who helped to draft the new rules, explained
that the draft has now been completed and is with the Guernsey
Financial Services Commission (GFSC) for a final review.
He explained that the rules are “pretty much signed off” and
“are expected to be in place by the end of the year”.
Before the new rules go live, a consultation paper will be sent
out to the marketplace for comment.
Guernsey was also named as the domicile for other insurance
captives, longevity swap transactions and various other reinsurance
vehicles and arrangements.
These SPI rules already exist in Bermuda, making it possible for
somebody looking from the outside to understand the jurisdiction’s
approach to SPIs in terms of solvency and capitalisation.
Heylar explained: “The work is already happening, the business
is already being conducted in Guernsey, there was just no where to
go to see what the rules were.”
“These new rules will be codifying digressions that the
commission are passing different types of applications and it will
be extensive guidance on the types of collateral available.”
With Guernsey also introducing the new rules, Helyar suggested
that this would bring them “on to a level playing field” with
Bermuda and other ILS domiciles.
Mark Cook, director at Willis Towers Watson, also drew attention
back to innovation in Guernsey, discussing the rise of captives
with employee benefit risk.
-
Cook noted that there are now approximately 100 captives funding
employee benefit risk, with most of those launching over the last
five years.
He said: “It is not just traditional risk products and health
products we are talking about, stop-loss products, medical
programmes and so on.”
Cook revealed that another trend he is seeing in the industry is
a rise in longevity swaps. He used the British Telecom Pensions
Scheme (BTPS) as an example.
BTPS was a £16 billion transaction, completed in July 2014, to
transfer a quarter of its longevity risk to the Prudential
Insurance Company of America.
BT established its own captive insurer, a Guernsey-based
incorporated cell company (ICC), allowing it to access the
reinsurance market directly without paying a bank or insurer to act
as an intermediary.
“The reinsurance market is providing companies with a good deal
compared to the traditional ones that banks are offering,” said
Cook.
Brexit
Stewart also questioned the panel on whether they thought Brexit
was an opportunity, challenge or deadweight on the captive
industry.
Oliver Schofield, executive director of RKH Reinsurance,
described Brexit as an “opportunity”.
He said: “I don’t think it is something that we, as an industry,
should be overly scared about.”
Schofield showed confidence that Brexit will not affect the
captive marketplace, he said: “The insurance and reinsurance
industry around the world has reacted well to times of
uncertainty.”
When it was decided in June this year that the UK would leave
the EU, there were concerns around passporting for captives.
Schofield suggested that the industry should not be concerned about
passporting issues in the captive market, but rather for other
industries, as “there might be all kinds of issues”.
Schofield said: “For the captive industry, I see it as a great
opportunity for people who are current owners or potential owners
of captives to be able to take a long look at the playing field
that there is and decide what is going to be the best approach for
them.”
“I don’t believe that there will end up a regime that will
strangle the benefits of captives to their corporate sponsors.”
Solvency II
With the uncertainty around Brexit, there are still a lot of
questions around the UK and the Solvency II regime. Although
legally the UK will not have to abide by the Solvency II initiative
anymore, if it still wants to trade within the EU it will have to
stick to the Solvency II legislation.
Schofield explained: “We also know that most insurers and
reinsurers around the world, regardless of whether they are
European headquartered or trading into Europe, regard Solvency II
being the benchmark for superior finance management and I don’t see
that as being a threat, I see that as an opportunity.”
-
On the flip side, Solvency II has the potential to push
businesses away from the EU if they are against complying with
Solvency II regulation. Cook explained that one of Willis Towers
Watson’s pension captive clients, based in the EU, is against
complying with Solvency II for pension reserving. Because of this,
the client is looking to move outside of the EU. Cook noted that
this has been within the last six months.
IAIS insurance core principles
Stewart addressed Caroline Bradley, deputy director of the
Guernsey Insurance Division and member of the International
Association of Insurance Supervisors (IAIS) task force, to ask
about any developments and how Guernsey stood within the latest
IAIS meeting.
Bradley said that, from the first meeting, she recognised that
the current IAIS insurance core principles (ICPs) need to be
updated.
She explained that the current ICPs, relating to the supervision
of reinsurance and reinsurers, would need to be updated because
they reflect issues that were around at the time the standards were
written.
Bradley recently attended a meeting, held in Bermuda with the
newly set up IAIS task force, which was designed to review the
ICPs.
She said: “We feel that it is important for Guernsey to be
involved in those types of forums with that kind of company so that
we can then ensure that the regulations, as they develop, take
account of jurisdictions like Guernsey in terms of entities and the
types of regulatory framework that we have.”
Bradley noted that the ICPs currently deal with things such as
contract certainty, finite reinsurance and issues that were hot
topics with regulators a number of years ago but that are not such
an issue now.
-
She said: “I think we are well-placed in Guernsey within
regulatory framework to both influence the standards that have been
developed but also to meet those standards because in Guernsey we
have always regulated reinsurers, whereas other jurisdictions
haven’t so they are catching up with that.”
“I do think it is important for Guernsey to be in the forum so
we can influence those standards as they develop.”
Wheatley expressed his enthusiasm towards Bradley’s work with
the IAIS around global regulatory standards, and the possible
creation of a level playing field.
In his closing remarks, Wheatley explained that although the
collateralised reinsurance sector has seen growth, he can see the
market growth “accelerating”.
According to Wheatley, there have long been rumours about the
bottoming of the soft insurance market.
He said: “I think ever since 2002, people have been telling me
that it’s going to bottom out any minute now.”
“I take the suggestion that we might be seeing the bottoming of
the market with a massive pinch of salt.”
Wheatley suggested that, as a captive domicile, Guernsey remains
at an advantage of being outside the EU and by being in an
environment of “real substance” having not only a regulator by an
industry of “true excellence” that all of those people who come to
Guernsey for their captive business “appreciate greatly”.
“The Guernsey Insurance Forum has demonstrated how the global
insurance market is changing, through evolution in some areas and
transformation in others, and how the Guernsey industry is
responding to these demands and opportunities with intelligence and
energy and playing a key role in the innovation required,” added
Wheatley. CIT
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831(b) Captives
Alan F ine of Brown Smith Wal lace expla ins three key options
to maintain compliance w i th changes to Sect ion 831 (b )
Compliance considerations
18 19
The Protecting Americans from Tax Hikes Act of 2015 created
changes for 831(b), a section of the Internal Revenue Code that had
not been amended in 29 years. As originally written and enacted,
Section 831(b) provided “small” property and casualty insurance
companies with premiums less than $1.2 million, an annual option to
elect to be taxed solely on their investment income (rather than
the sum of their underwriting and investment income).
As a result of the changes in the act, captive owners are asking
what their options are in order to bring their captive into
compliance with the new law.
One of two diversification tests must be met
The act’s changes take effect on 1 January 2017. These changes
are geared toward curtailing the use of the micro captive insurance
structure as a means of distributing wealth to heirs without being
subject to either estate or gift taxes, which US Congress deemed to
be abusive. It is important to note that this does not mean
that
structures taking advantage of this benefit prior to 1 January
2017 will be deemed to be abusive or overturned due to the estate
planning benefit taken.
In addition to increasing the premium limitation to $2.2 million
per year, the amended law also provided two “diversification”
tests, at least one of which must be met in order for the company
to be eligible to make the Section 831(b) election.
The first diversification test provides that no single
policyholder may account for more than 20 percent of the insurer’s
net written premiums (or, if greater, direct written premiums).
Importantly, this threshold is measured on a controlled group
basis, meaning that all companies with more than 50 percent common
ownership are treated as a single policyholder for these
purposes.
The alternate diversification test provides that in situations
where a spouse or lineal descendant of a business owner has
ownership of the insurance company, their ownership in the
operating business
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831(b) Captives
19
must be within 2 percentage points of the insurance company.
This test in particular is designed to eliminate the potential
estate planning benefit associated with having a captive owned by
one’s heirs.
Options to ensure your captive complies with the new law
One of the diversification tests must be met for years beginning
on or after 1 January 2017, in order to be eligible for the 831(b)
election.
Change ownership: one option is to actually change the ownership
of the existing captive so that it conforms to the requirements of
the new law. If, for example, the children of the business owner
own 100 percent of the captive but none of the operating
businesses, they could sell their interest back to their parent. It
is important to recognise that this will create a gain on which the
children will have to pay income tax. Should this strategy be
preferred, it is critically important that the sale be structured
on an arms’ length basis in order to avoid challenges by the IRS
for a bargain sale. Accordingly, a valuation of the captive should
be performed by a reputable service provider with experience in
this area.
It may be determined that the needs which led to the creation of
the captive no longer exist. In that case, the captive could
surrender its license and liquidate. It is important to note that
this liquidation may lead to two levels of tax: one at the
corporate level, to the extent that the captive is holding
appreciated assets, and a second by the owner of the captive.
Therefore, it is vitally important to make sure that an appropriate
valuation is performed of both the captive itself as well as the
assets it owns.
Freeze current captive: the second option available would be to
‘freeze’ the current captive—discontinue paying premiums to this
entity and surrender the insurance licence. The benefits of
implementing this strategy include deferring the tax that would be
imposed by implementing the first option and keeping the amounts
out of the parent’s estate. The former captive, with its existing
capital, could be used to create or buy a new business or to lend
funds to the operating businesses as needed.
The idea of borrowing from the former captive is similar to that
of creating the captive, in that there is more flexibility in
structuring the terms of the loan agreement (as long as they remain
on an arm’s’ length basis). The business owners could then create a
new captive that does meet the new ownership requirements of
Section 831(b).
Forgo 831(b) election: finally, in some situations it may make
sense for the captive to forgo the 831(b) election. This doesn’t
mean that the premiums paid to the captive would not be deductible.
Instead, the captive would pay tax on all of its taxable income,
not just its investment income. This may make particular sense for
those captives, which incur significant/frequent losses, as these
losses would now be deductible (which is not the case for an
insurer making the election to be taxed solely on investment
income).
This has the added benefit of not having to restructure the
ownership of the captive. It may also not require a change in
business plan or approval of the department of insurance, depending
on the captive’s domicile. It is strongly suggested to consult with
your advisor before concluding no communication is necessary with
the department of insurance.
The changes to Section 831(b) provide an enhanced opportunity
for those choosing to utilise a captive insurance strategy. Each
captive owner should consult with someone experienced in this area
in order to understand whether they are in compliance with the new
law, and what the best alternative is for those situations where
the new requirements are not met. CIT
Alan Fine, Partner in charge of
captive insurance advisory services,
Brown Smith Wallace
The 2015 changes to Section 831(b) provide an enhanced
opportunity for those choosing to utilise a captive insurance
strategy
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GEB Forum
21-23 Novmember 2016Brusselswww.gebforum.com
The 2016 Generali Employee Benefits (GEB) Forum will take place
in Brussels, where global headquarters is based, and celebrate the
50th anniversary of the GEB Network.
FERMA Seminar 2016
03-04 October 2016Maltawww.ferma.eu
The 2016 FERMA Seminar will bring together risk management and
insurance professionals from across Europe to discuss the latest
developments in risk management and the insurance market. The event
is dedicated to risk and insurance managers with the themes:
education, communication and leadership.
-
http://www.bfsb-bahamas.com
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Industry Appointments
22
Markus Schmutz has joined Rewire Securities as partner.
Previously, Schmutz served as head of insurance-linked securities
(ILS) market at Swiss Re Capital Markets in New York, where he was
responsible for ILS transactions.
Stefano Sola, co-founder and CEO of Rewire, said: “Markus
Schmutz will be instrumental in further developing
Rewire’s underwriting analytics and related ILS products with a
key focus on further integrating rewireconnect, our insurance risk
transfer technology platform.”
Karen Weldin Stewart will stand down as insurance commissioner
for Delaware, after losing her vote in the primary contest.
Stewart was first elected to the post in 2008 and was re-elected
in 2012. In the primary contest on 13 September she lost the vote
to democratic party candidate Trinidad Navarro, who will run for
the insurance commissioner role in 2017.
Navarro, who received 54 percent of the vote, will now face
Jeffery Cragg, the republican party candidate, in November’s
general election.
Cragg beat rival republican candidate George Parish in the
primary contest, winning 51 percent of the vote.
Hanover Stone Partners (HSP) has named Katherine Dedrick,
William Goddard and David Seibert as senior risk advisors,
expanding the company’s risk management services.
Dedrick, who will be based in Chicago, has more than 30 years of
experience in insurance, risk management and corporate governance
issues.
Goddard has previous experience with risk management, medical
benefits, insurance brokerage and claims management. He will be
based in St Louis.
Seibert, who brings experience in risk management, finance and
information system management, will be based in St Paul.
John Kelly, founder and CEO, HSP, commented: “As clients in
numerous industry sectors throughout the US rely on our firm for
strategic risk advisory services and proven expertise in risk
management programme development and implementation, we are
continuing to expand our capabilities with the industry’s leading
risk and insurance professionals.”
“We’re pleased to welcome to our team Katherine Dedrick, William
Goddard and David Seibert and look forward to our work together on
behalf of our clients.” CIT
Group Editor: Mark
[email protected]+44 (0)203 750 6017
Deputy Editor: Stephanie
[email protected]+44 (0)203 750
6019
Reporter: Becky [email protected]+44
(0)203 750 6018
Contributors: Drew Nicol, Barney Dixon and Shirley Fehr
Rodriguez
Business Development and Design: John
[email protected] +44 (0)203 750 6021
Publisher: Justin [email protected]
+44 (0)203 750 6028
Designer: Steven [email protected]+44
(0)203 750 6021
Recruitment Manager: Chris
[email protected]+44 (0)203 750 6024
Office Manager: Chelsea
[email protected]+44 (0)203 750 6020
Office fax: +44 (0)20 8711 5985
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Rewire Securities, the Delaware Insurance Department and Hanover
Stone Partners all see personnel changes
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